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 Revenue and profit fell for most of the world's major trading banks
in the three months to September, and the outlook for next year
points to further declines, especially in Europe.
Revenue plunged at some major U.S. institutions, too, but most are
in better shape than their European counterparts. They are expected
to continue gaining market share in fixed income, currency and
commodities (FICC).
FICC trading revenue at 13 of the world's biggest banks was $16.8
billion in the third quarter, according to data analysis firm
Tricumen. That was down almost 20 percent from $20.86 billion the
same period a year ago.
The conundrum they face is how much further they can cut before
losing market share. Cost cuts are likely to target specific areas
of their trading.
"Traders' life was made easy for a long time. Those days have come
to an end. The question is who wants to be market maker to all men,"
said Peter Hahn, senior lecturer in finance at Cass Business School.
"Investment banks' main trading partners over the last 20 years have
been other financial institutions. So the revenue potential has been
reduced. The landscape has changed," he said.
According to Morgan Stanley analysts, FICC revenues this year across
U.S. and European banks will be $82 billion, down from $88 billion
last year, and they expect the trend to continue. Weakness in Europe
will lead to a decline to $80 billion next year and $77 billion in
2017. In 2009, global FICC revenues were $157 billion.
JOBS ON THE LINE
Post-crisis regulatory changes are forcing banks to hold more
capital and liquidity, effectively making them less able to trade.
The reduction in market-making is drying up broader market
liquidity. Against this backdrop, banks are unlikely to expand FICC
trading anytime soon.
Seven years after the crash, banks are still struggling to adjust,
although U.S. banks are a few years ahead of Europeans in cleaning
up balance sheets and operations, analysts say.
The three-decade bull market in bonds could be near an end, too.
Global interest rates and bond yields are at all-time lows - and in
some cases negative - and the Federal reserve is close to raising
U.S. rates for the first time since June 2006.
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Even at banks where FICC trading held up in the third quarter, the
outlook isn't rosy. Deutsche Bank's FICC revenue rose 20 percent,
but it is exiting some products, including "market making in
uncleared Credit Default Swaps, certain legacy rates products and
agency residential mortgage-backed securities."
Germany's biggest lender recorded a 6 billion-euro loss in the
quarter, scrapped its dividend for the first timer and said it would
ax 15,000 jobs.
Credit Suisse said it will shed 1,600 jobs in Switzerland over the
next three years and cut investment banking staff in London. It will
also reduce activities in its "macro" business - effectively FICC
trading - by the end of this year.
Standard Chartered said it would slash 15,000 positions, and last
year Barclays said it would shed 19,000 jobs.
However, FICC losses are likely to be mostly back office and support
jobs, not front-line trading, said George Kuznetsov at financial
industry analytics firm Coalition in London.
Further pruning would render many desks unable to support client
demand for trading services. European banks in particular are aware
of this and how aggressive the big U.S. banks have been in grabbing
FICC market share.
"Banks – especially Europeans - are soul-searching around businesses
which aren't core to their client franchise and product strengths,
or fail to meet increasingly stringent capital requirements,"
Kuznetsov said.
(Reporting by Jamie McGeever)
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